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Navigant Consulting, Inc NearTerm Risk/Reward Profile Is Probably Favorable

Wednesday morning, December 5, Navigant announced the acquisition of AFE Consulting, an economic consulting firm with a focus on
securities litigation. The acquisition will add about 30 professionals to Navigant’s economics practice. AFE has a highly leveraged staffing model, so only one managing director, Dr. Mukesh Bajaj, will be added. Dr. Bajaj is a well‐known consultant from his time at LECG and was highly sought after by consulting firms following the demise of LECG. The acquisition will reunite Dr. Bajaj with Navigant’s economics practice leader, Dr. Mohan Rao, who is also an LECG alumnus (so he is not part of the group of consultants from the former Chicago Partners acquisition who are departing for Charles River [CRAI $18.22; Market Perform] next year).

The acquisition of AFE will help offset a portion of the expected departure in May 2013 of some consultants from the company’s 2008 acquisition of Chicago Partners. One of the benefits we see the AFE business having over the Chicago Partners group is that AFE’s focus on securities litigation work is better aligned with Navigant’s disputes and litigation business. Chicago Partners focused mostly on antitrust and labor/employment issues, which had limited overlap with Navigant’s other business lines. In addition, the highly leveraged consulting model used by AFE probably produces better profit margins than the former Chicago Partners business. The highly leveraged model of AFE creates some risk for Navigant since the long‐term promise of the acquisition is heavily dependent on the retention of Dr. Bajaj. Thus, we believe Navigant likely included a longer‐thannormal
tie‐up provision in the purchase agreement to mitigate some of that risk

No financial details of the transaction or the acquired business were released. We note that before Navigant’s segment realignment earlier this year, its economic segment generated about $600,000 of revenue per professional. Given the higher proportion of support professionals at AFE than at Chicago Partners, however, we would use a more conservative assumption for AFE. Assuming that AFE generates about $400,000 of revenue per professional, we estimate that AFE will contribute about $12 million per year.

If we assume Navigant funded the purchase with excess capacity on its existing revolver (and assuming Navigant paid a bit over one times revenue, or about $15 million, although we have no knowledge of the purchase price), we believe AFE could be accretive to EPS by $0.01 in both 2013 and 2014. Thus, we are increasing our 2013 and 2014 EPS estimates accordingly to $1.01 and $1.09. Based on our estimates, already‐completed acquisitions (Pike Research, Easton, and AFE) should add about 300 basis points to revenue growth in 2013. The departure of the consultants from Chicago Partners will have an impact in late 2013 and in 2014, but these acquisitions set the company up well to meet the existing expectations. We now project about 2% organic growth for 2013, and the consensus appears to imply about 1%‐2% growth in 2013.

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